Market Place; Branching Out From Auto Parts

By Richard D. Hylton

Published: August 21, 1989

Among the host of companies looking to cash in on the renewed emphasis on environmental issues, the SPX Corporation is in a fairly unusual situation.

The company, known as Sealed Power before a restructuring in May, has long been a maker of parts for automobile engines. At one time, it was the nation's largest manufacturer of piston rings. SPX still owns an interest in its engine-parts manufacturing business, but the company wants to transform itself into a manufacturer of environmental control equipment, while continuing to manufacture and distribute a broad line of precision engineered equipment used in automobiles and appliances.

The stock closed Friday at $33.875, unchanged, in trading on the New York Stock Exchange. The price/earnings ratio is nearly 10. The company shows some potential for a steady increase in profits. It had earnings of $44.9 million, or $3.64 a share, on sales of $878 million last year. Sales could grow by 15 percent this year, said David Garrity, an analyst at Robert W. Baird & Company.

Mindful of the overcapacity and weakening demand in the auto business, the company in May transferred its automotive original-equipment division to a limited partnership, Sealed Power Technologies L.P., in which it holds a 49 percent interest. Goldman, Sachs & Company owns 49 percent, and 2 percent is held by the division's management.

In the transfer, SPX received about $260 million in cash, which it used to pay down $85 million of bank debt and give shareholders a one-time $13-a-share dividend. The company also formed an employee stock ownership plan and it plans to sell several small operations. Another division, Sealed Power, a wholly owned subsidiary, is a distributor of the company's automotive parts.

So how is this an environmental technology firm?

Well, for starters SPX has the only patented equipment currently in production for recovering and recycling freon, a substance used as a refrigerant in air-conditioners and refrigerators. Freon is a chlorofluorocarbon, a group of substances that have been found to destroy the ozone layer of the atmosphere.

The Bush Administration has made clear its intention to eliminate production of chlorofluorocarbons by the year 2000. Because the available substitutes for freon are limited and none are suitable for use in air-conditioners or refrigerators, there will probably be a scarcity of freon in the next decade and great demand for equipment that can remove it safely and store it for re-use.

Mr. Garrity estimated that the American market created by the pending regulations on the production and use of freon would be $150 million to $250 million.

Mr. Garrity suggests that the steady increase in profits that SPX will get from manufacturing this equipment is not yet clear to most market players who watch the stock and this represents a good buying opportunity for investors. He expects the stock to climb to nearly $40 in the near term.

SPX recently signed a contract with General Motors to put SPX's recycling equipment for servicing automobile air-conditioners in the repair shops of all its dealers, beginning this fall. If Ford and Chrysler follow suit, the company might see a significant surge in revenue.

The other area of SPX's business that looks promising is its manufacturing of electronic diagnostic equipment for the auto market. The company could benefit from the increased rate of automotive technological change. Mr. Garrity said the growing sophistication of cars would make SPX's diagnostic equipment very attractive at every stage of the car business.

''Today's cars have roughly 25 electronic subsystems and it is expected that by 1997 more than 300 subsystems will be used in braking, steering and suspension, in addition to engines and emissions,'' Mr. Garrity said. ''By 1995, the percentage of vehicle-manufacturing cost that electronics represent may be as high as 23 percent of the entire vehicle. This points to strong demand for the diagnostic equipment.''

Some analysts are skeptical about how successful the changes will prove.

''My view in general is that they've shuffled their assets around,'' said Jean-Claude Gruet, an analyst with UBS Securities. He added that the sale of the assets reduces the company's exposure to the original-equipment market for car parts, ''but they nonetheless still have an exposure on that side.''

As Mr. Gruet implies, SPX is still an original-equipment manufacturer for the slowing automotive market, and if its freon-recycling equipment fails to sell well, the outlook for future earnings is suddenly dimmer.